We Don’t Make Enough Money to Repay Our Debt. What Do We Do? – Melody

I started out with nothing graduating from a private christian home. However I have accrued a $3,000 or more student loan. The first college I tried going to was a big money racket but i didn’t know that, now I do. I have about a $1,500 credit card debt that is already in collections. I have about a $500 checking account debt from a bank. I had issues with getting an id to get a job and i had to acquire a car to maintain a job plus i had to eat and pay rent and electricity and gas to get to and from work. I have a $400 debt with Direct TV (early cancellation!).

I recently married in December and my husband had 2 large $600 a piece medical bills from the same hospital and a $500 one from his previous doctor who conveniently forgot to bill the insurance and by the time we found out it was too late!

He also tried to help a friend with electricity and put a bill in his name. Now he owes over $550 to debt collections for the electric since his friend moved out and now has no job! My husband and I both work 40 hours a week at $9 an hour. We barely make ends meet! Are credit shows out collections so no one wants to give us loan. All I want is a loan for about $7000 to pay all of this off! I would rather make payments on the loan then make our credit sink lower and lower! But everyone we know automatically declines us as soon as they see collections on our credit reports! I try making little payments but everyone wants payment by a certain day and i get late charges plus they all keep accruing with these stupid apr rates!

Your Question(s)

1)Can you help us? If so what can we do?

2) Is there any way to get a loan for the $7,000? (I will pay it off I just want to consolidate it)

3) If the loan is not the answer what can I do? (I do not want to file bankrupt I want to fix our credit.)

Melody”

Dear Melody,

Thank you for your question.

The root cause of the current situation is insufficient income. I know the two of you are doing the best you can. I understand that and I’m certainly not casting any blame about your current earnings.

It is obvious that you have the desire to meet your obligations and outside of your new husband wanting to do a good thing for a friend and put the electricity in his name or guarantee the bill, everything else looks like normal life stuff. It’s the type of debt I typically see with people in similar situations.

You’ve learned some important lessons here I’d like to recap so you never have to repeat them.

Medical Insurance – Most people get this wrong. Insurance is there to essentially reimburse you. You are responsible for the bill. The insurance company pays the doctor out of common practice but if you turn your back on making sure the insurance company processes the claim, well, you see what happens.

Cosigning for a Friend – Ya, don’t do that unless you are willing to accept full responsibility for any bill your friend may incur. While you are trying to do a good thing to help a friend you are really doing a bad thing for yourself. Not only are you on the hook for the debt but it will most likely appear on your credit report as well. I know it’s tough to say no but that’s what you need to say.

A year or so ago I went in with a friend to a car dealer and somehow the salesperson got around to asking me if I would cosign for my friend. I couldn’t help busting out laughing. I’m the champion of never cosigning. Never, ever,ever,ever,ever cosign. Once I stopped laughing I told my friend, “I love you, but no.”

Early Termination Fees – Be aware that many services have early termination fees. Sometimes the cost of the fee is less than continuing a service you don’t need. Contracts for things like mobile phones have termination fees, as well as DirectTV apparently. Rather than think twice about terminating a contract early, consider if the termination fee is an expense you are willing and ready to pay before you signup for the service. If not, don’t get the service.

I would suspect from what you’ve shared that your credit sucks. That’s understandable based on your income and the amount of collection accounts. It’s the result that naturally occurs. We can focus on improving your credit once you clear the decks of this debt and increase your income. I even wrote this guide to show you how to do it.

And here is where some may be critical of my point of view. What I’m about to say will seem counterintuitive to some. Even though you have $7,000 of debt, bankruptcy is a real option. There, I said it.

People that have more income and money floating about may initially feel you don’t owe enough to go bankrupt. Some incorrectly think you have to owe a lot to think about bankruptcy.

But the reality in your situation is that $7,000 might as well be $70,000. It might not be a big number but it’s out of your reach. And if you don’t do something to remedy this situation the possible outcomes are not that great.

So let’s say you do nothing. It is possible for a creditor to sue you and even go for a judgment or wage garnishment. Depending on where you live your low income may be somewhat or totally protected from garnishment but risking any income to a garnishment can send you further over the financial edge. It’s a risk that seems unreasonable.

There are places to get unsecured debt consolidation loans, like LendingClub but I suspect your income and credit score would disqualify you at this point. Besides, with your current credit score the interest rate would probably be huge. That approach seems not logical.

The most logical approach seems to be a multi-step affair.

Use the public benefits finder to identify any public benefits you are eligible for. Every dollar of public help is a dollar you don’t have to earn so your current income will go further to pick you up out of the pit you are in. You may be eligible for food or energy assistance. Just use the online tool and see what programs might be available to you.

Seek additional employment. Maybe one of you can find an additional part time job to bring in some extra money to relieve the financial stress. This will become important when we get to the next step.

Save money. Bankruptcy will clear the decks of the financial obligations that are not permitting you to start saving money in an emergency fund. You need to have $2,000 or more saved up in case of an emergency so you are not left in collections again. If you have to dip into the emergency fund, replace the money to keep your balance up.

Rebuilding your credit after all of this is going to be important to do. I gave you the link to my guide above. The importance of having a good credit score is so when that day comes when you want to buy a house or a car you won’t have to pay through the nose for bad interest rates. Your new good credit will save you a lot in your lifetime and you can have good credit without going into debt to get it.

Overall I think this is a positive outcome to a very unfortunate situation. There’s no sense wasting a perfectly good mistake, I always say. We might as well learn from it and do better moving forward.

This approach will help you to deal with the old debt and move forward and create the best chance of future financial success.

Please post your responses and follow-up messages to me on this in the comments section below.

I have been in banking with both large banks and credit unions for almost five years. Much of that time was spent underwriting (being the person who says yes or no on a loan) and based on the information you’ve given here I think we need to understand where your money is going. The amount of debt that you have $7,000 is actually a very manageable percentage of your gross income which you stated $37440 (for $9/hour for both of you). That is actually only about 18% of your annual income, so that means that you could easily develop a spending plan to pay your entire debt off in two years (on a tight budget) or three years (on a reasonable budget). As an underwriter I can tell you that most people are in debt more than 20% of their annual income (some as high as 50%) and although they may have good credit to get some sort of loan, you don’t need that! In this case most of your collections accounts don’t continue to grow, in fact many will be willing to settle with you for less than you owe IF (AND ONLY IF) you can offer them a lump sum. So lets break down a payment plan exactly how you would do it with a loan (minus paying interest!).

Now although your credit card debt may have interest applied to it IGNORE THAT. It is very very likely you’ll be able to settle for $1500 if not less so long as you have a lump sum. Now go open a savings account at ANOTHER CREDIT UNION (not bank, they suck!) and set up automatic payroll deductions from you and your husband’s paychecks to take the money is out before it even hits your bank account. Will you really miss 6% of your paycheck? Maybe, but its for a good cause. Now just go about life as usual, ignore collections and RESIST all temptation to take the money out. Once you have enough to pay off one collection account in full, call the company and try to negotiate a settlement, you may or may not be able to get it down but at least you’ll get it done. I would recommend prioritizing the credit card debt first as it hits the credit report differently.

Right now your credit is in a bad spot, getting these paid off will help somewhat. Once you’ve got it all squared away consider taking out a secured credit card to help get you back on track as far as establishing a good credit history.

If I were in your position and able to get credit, I still wouldn’t take it. Credit means paying interest and the likelihood that you default and get yourself into a bigger mess. Discipline your spending and you’ll be just fine. You are in way way way less trouble than many of the people I see on a regular basis.

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